- Marc Quintyn, Bernard Laurens, Hassanali Mehran, and Tom Nordman
- Published Date:
- September 1996
The major reforms undertaken in the exchange system, banking sector, money and capital markets, and monetary policy from 1978 to 1995 are presented on pages 86–88. The reforms are grouped chronologically. The first phase (1978–84) marked the reestablishment of the financial and exchange system, and the second phase (1984–88) witnessed its diversification. The third phase (1988–91) was characterized by recentralization of the financial and exchange system, while commercialization and expansion marked the fourth phase (1992–95).
|Phase||Exchange System||Banking Sector||Money and Capital Markets||Monetary Policy|
|First Phase: Reestablishment of the Banking System (1978–84)|
|Third Plenum of the Central Committee of the Communist Party makes a decisive break with the legacy of the Cultural Revolution and resolves to focus the Party’s work on economic development in order to achieve substantial, sustained gains in output To achieve this objective, it is decided that market-oriented reforms will be adapted.||A single exchange rate is established for internal settlement of trade transactions.||Allocation of investment funds shirts from budgetary grants to bank lending.||The issuance of government securities is resumed through compulsory sales to enterprises and individuals.||Monetary policy is still dominated by the credit plan and the cash plan, the financial counterparts of the physical plan.|
|An experimental trading system is established by the BOC in a few cides, where domestic enterprises are permitted to sell foreign exchange to other domestic enterprises at the internal settlement rate. The BOC acts as broker.||Three specialized bants are established to operate in specific sectors of the economy (PCBC. BOC, and ABC).||Interest rates are set by the PBC under the authority of the State Council.|
|A network of RCCs is set up under the supervision of the ABC.|
|The first NBFIs start to operate, including a number in the coastal regions (ITICs mainly), quite often at the provincial level.||Private enterprises are allowed to issue shares.|
|Second Phase: Diversification and Innovation (1984–88)|
|A directive of the State Council formally establishes the PBC as the country’s central bank by removing its urban commercial activities, thereby finalizing the transition to a two-tier banking system.||The use of the settlement rate is discontinued. All transactions are to be done at the official rate set by the SAEC.||A fourth specialized bank, the ICBC, is established to take over the commercial activities that were removed from the PBC.||The ABC establishes prototype intrabank market other banks follow.||Reserve requirements are introduced; different rates apply according to the type of deposits (20–40 percent).|
|PBC establishes lending facilities for banks.|
|The foreign exchange regime is changed from one of pegging to a basket to a system of managed floating.||Provisional regulations entrust the PBC with responsibility to conduct monetary policy and regulate and supervise the financial system, as well as the money and capital markets.||The first information centers appear in some major cities, thereby introducing the concept of an interbank market.||Ratio of reserve requirements is reduced and made uniform at 10 percent.|
|Chinese enterprises and foreign investment corporations in SEZs are permitted to transact foreign exchange at freely negotiated rates (the retention quota system).||All banks are allowed to engage in foreign exchange transactions.||Local enterprises are allowed to issue corporate bonds with the prior approval of the PBC. Interest rates on these bonds are allowed to be up to 40 percent higher thanrates on bank deposits.|
|UCCs are opened under ICBC supervision, and TICs and securities houses proliferate.|
|SOFs are permitted to issue shares carrying no ownership rights.||Banks are permitted, upon approval from PBC. to issue financial bonds. The interest rate is set 2 percentage points above deposit rates of similar maturities.|
|Banks are allowed to adjust interest rates on loans within a 10 percent margin above the administered rate.||Credit quotas become more indicative.|
|Two “universal” banks are permitted to compete with existing banks in all forms of business.||Secondary market trading in government securities is allowed on an experimental basis.||Ratio of reserve requirements is raised to 12 percent.|
|The Government begins to diversify its debt instruments with the issuance of key construction bonds, state construction bonds, and special state bonds to households and state enterprises.|
|Third Phase: Rectification and Recentralization (1988–91)|
|In the wake of a bout of inflationary pressures, a stabilization program is introduced (the “rectification program”), in which structural reforms are given lower priority than stabilization and administrative measures are used to supplement nascent indirect instruments of macroeconomic control.||The right to trade in retention quotas is extended to all domestic entities engaged in foreign trade. Those who were also permitted to retain foreign exchange earnings are permitted to transact retention quotas in the swap centers. By October 1988.80 swap centers have been established.||The TIC sector is reorganized: the number of TICs is significantly reduced through mergers and absorptions.||The State Council officially approves trading in government securities. Gradually, trading Is extended from 7 cities to 63 cities, and other securities (bonds, shares, and nongovernment securities) are added to the list.||Ratio of reserve requirements is raised to 13 percent|
|Fiscal bonds are sold for the first time to financial institutions.|
|Official rate is used for the foreign exchange plan, the surrender of foreign exchange, and purchases made with retention quotas.||The SAEC issues regulations on priority access to foreign exchange traded in swap centers.||The Stock Exchange Executive Council is founded.||Guidelines on “excess reserve requirements” are introduced in arange of 5-7 percent of domestic currency deposits.|
|The 1986 measure allowing banks to adjust loan rates above the administered rate is reversed. Credit quotas again become mandatory.|
|High Inflation prompts the Government to issue “price-indexed” bonds.||Banks are again allowed to adjust Interest rates on loans within specified margins (60 percent for RCCs, 30 percent for UCCs, and 20 percent for the other banking Institutions) above rate set by PBC.|
|The PBC establishes the Quotation Center for government securities. The Shanghai Securities Exchange is officially recognized.||The PBC regulates interbank market rates and promulgates new measures to regulate interbank markets.|
|The Shenzhen Stock Exchange is officially recognized. Treasury bonds for households are issued via an experimental underwriting syndicate|
|Fourth Phase: Commercialization and Expansion (1992–Present)|
|Fourteenth National Congress of the Communist Party endorses the views of senior leader Deng Xiaoping and adopts goal of establishing a “socialist market economy.”||Part of the retention quotas made available to the state are purchased at a premium equal to the monthly weighted average of the rate in the swap market.||The rectification program ends. The authorities announce their intention to accelerate the reform process. Gradually, more commercial banks, mostly of regional scope, are licensed.||The Quotation Center is transformed into the NETS.||Banks and NBFIs are ordered to recall all loans on the interbank market granted to finance real estate or securities. The PBC issues new guidelines on interbank activities.|
|The PBC starts selling the quotas that it has bought at the market rate to importers through the swap market at the prevailing swap market rate.|
|Third Plenum of the Fourteenth Central Committee outlines and approves a comprehensive reform strategy in which financial reforms are mentioned as a key element to strengthen the capability for market-oriented macro-economic management.||The State Council decides that the SAEC should function under the guidance of the PBC.||Three policy lending banks are established.||Paperless treasury bills are issued through an underwriting syndicate. The PSSS, planned to be the (temporary) infrastructure for payment and settlement related to open market operations, is established.||Decision is made to extend the bulk of PBC credit at the PBC headquarters level, thereby reversing the previous practice of extending credit at the branch level.|
|The PBC lifts the cap on the swap rate.||PBC overdraft or direct loans to the Government are discontinued. Some PBC loans extended to the state commercial banks and other financial institutions are called back for monetary policy purposes.|
|The SAEC issues regulations on licensing, capital, operations, controls, and risk limits for foreign exchange operations.||Special deposits are used to absorb excess liquidity in the system.|
|Guidelines on asset-liability management are introduced for all banks, and credit quotas are replaced by loan-to-deposit ratios for the UCCs and TICs. Only four state commercial banks and four universal banks remain under credit quotas.|
|The official and swap market exchange rates are unified at the prevailing swap market exchange rate.||The PBC law is enacted. The commercial bank law is enacted.||Plans are prepared to liberalize interest rates and to develop an integrated interbank market.||Excess reserve guidelines are complied with on a consolidated, bankwide level, while monitoring remains at the branch level.|
|The CFETS becomes operational, creating an integrated system of foreign exchange trading centralized in Shanghai.|
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